February 21, 2010
Market Summary: the rally that started on February 5, 2010 turns out to be a larger wave degree. I still believe that further drop is warranted due to the low trading volume in the rally compared to the volume during the drop. However, there has to be a limit where the forecast has to change if the market rallies further.
If this rally makes another new high, it will be the 2nd time (first one in July 2009) I was wrong calling the turn and surprised with the resiliency. Just like a marathon runner, there has to be a time when the stock market has to take a breather and we haven’t seen a similar degree breather in almost a year. Now whether that ‘breather’ will take us to a new bear market or just a short correction is a foggy subject for me. I hope it is just a short correction, which means the worst of the bear market was over in March 2009. But it would also mean that our fiat money economy will still be in play in decades to come, and it is not a good news for future generation. On the other hand, if it starts a new bear market that carries us to new low and perhaps a financial system revolution, it will be painful (perhaps very) to all of us but the coming bull market will be based on perhaps a sounder financial system.
Back to the current situation,
S&P 500 has been retraced by about 61.8% and VIX has dropped to the 20 point mark again. As I mentioned before, trading volume has been slowing down significantly in this rally compared to the volume during the drop, which indicates that a strong move is coming. Is it up or down ? I’m leaning towards down since there has not been any strong market news coming out during the rally. I’m not one who usually makes forecast based on news but news writers usually can be very convincing with their articles e.g. stocks up with good news and vice versa. However, when the US Fed Reserve increased their emergency interest rate (not the overnight lending rate), I saw Western news trying to justify Asian market drop the day after with the news, but when the US market ended up higher, they seemed surprise as well. Mixed up condition like this usually fuels speculative trading and also conspiracy theories in many blogs, which basically means, it is unclear where the market is going right now. When some big money comes in or out and moves the market to one direction big time, I believe trading volume will pick up again to that direction.
The stop here should be 1,130 on the upside and 1,080 for the downside. Any movement beyond those points would change or reinforce my forecast that the market is going in that direction even though it would not satisfy any Elliott wave rules yet.
Similar juncture is happening to the Canadian TSX index only amplified. TSX has retraced over 61.8% of the drop in this rally. Commodities and commodities stocks have rallied strong in this rally, which fueled TSX rally, and Canadian dollar has been resilient as ever. Although US dollar has move a lot against other major currencies (GBP, Euro, Yen, AUD – less but still strong), Canadian dollar has been holding its value. Our strong currency is probably a big factor in our strong real estate and stock markets as well. One thing I learn in the last few years though, Canadian market tends to amplify US stock market movement. So if the US stock market crashes again, our market will follow in stronger moves.
Safe investing,
RH
